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July 18, 2011
INITIATION TCL Communication (2618.HK)
Neutral Equity Research
Rising risk of EPS peaking; initiate with a Neutral rating
Investment view
We initiate coverage on TCL Communication with a Neutral rating and 12-
m target price of HK$6.9. As a 2G feature phone OEM, we expect TCL
Comm’s business to see slowing growth due to limited potential upside
in both the total addressable market and TCL Comm’s own market share
expansion starting 2012. On the other hand, we do not expect TCL
Comm’s smartphone business to be a significant profit driver, despite
rising smartphone demand in emerging markets. We believe the stock
lacks strong fundamental catalysts and the current share price reflects the
company’s moderate shipment growth and flattish earnings in 2012.
Core drivers of growth
We expect TCL Comm’s EPS to peak this year with flattish to slight
earnings decline in 2012/13 due to: 1) Limited upside in feature phone:
We expect feature phone shipment growth to decelerate in emerging
markets starting 2012. TCL Comm could find it difficult to significantly
expand its market share due to increasing competition from other Chinese
handset OEMs; 2) High entry barriers and challenging smartphone
industry dynamics in emerging markets: The increasing design
complexity, longer lead time for operators’ validation or qualification, and
customization requirement increase the uncertainty over TCL Comm’s
smartphone business. The low margins in the smartphone business may
make it difficult for TCL Comm to achieve sustainable profit growth.
Risks to the investment case
Feature phone market share gain/loss; stronger/weaker smartphone business.
Valuation
Our 12-m TP is based on 2.0X NTM EV/GCI, implying around 8X NTM P/E.
Industry context
Rising smartphone demand in emerging markets with severe competition.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
Robert Yen +886(2)2730-4196 rob.yen@gs.com Goldman Sachs (Asia) L.L.C., Taipei Branch Goldman Sachs does and seeks to do business with companies
covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC see the end of the text. For other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
Iris Wu +886(2)2730-4186 iris.wu@gs.com Goldman Sachs (Asia) L.L.C., Taipei Branch
The Goldman Sachs Group, Inc. Global Investment Research
Growth
Returns *
Multiple
Volatility Volatility
Multiple
Returns *
Growth
Investment Profile
Low High
Percentile 20th 40th 60th 80th 100th
* Returns = Return on Capital For a complete description of the
investment profile measures please refer to
the disclosure section of this document.
TCL Communication (2618.HK)
Asia Pacific Technology Peer Group Average
Key data Current
Price (HK$) 7.18
12 month price target (HK$) 6.90
Market cap (HK$ mn / US$ mn) 7,963.7 / 1,021.7
Foreign ownership (%) --
12/10 12/11E 12/12E 12/13E
EPS (HK$) 0.65 0.86 0.85 0.80
EPS growth (%) 2,476.5 32.5 (0.9) (5.3)
EPS (diluted) (HK$) 0.65 0.86 0.85 0.80
EPS (basic pre-ex) (HK$) 0.65 0.86 0.85 0.80
P/E (X) 11.1 8.4 8.5 8.9
P/B (X) 3.5 2.7 2.1 1.8
EV/EBITDA (X) 5.2 6.5 5.4 4.8
Dividend yield (%) 1.6 2.4 2.4 2.2
ROE (%) 42.4 36.5 27.9 21.7
CROCI (%) 101.1 47.0 45.7 42.0
Price performance chart
3
4
5
6
7
8
9
10
Jul-10 Oct-10 Jan-11 Apr-11
20,000
21,000
22,000
23,000
24,000
25,000
26,000
27,000
TCL Communication (L) Hang Seng Index (R)
Share price performance (%) 3 month 6 month 12 monthAbsolute (9.1) (8.2) 116.3
Rel. to Hang Seng Index (0.3) 1.9 100.3
Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 7/15/2011 close.
July 18, 2011 TCL Communication (2618.HK)
TCL Communication: Summary Financials
Analyst Contributors
Robert Yen
rob.yen@gs.com
Iris Wu
iris.wu@gs.com
Goldman Sachs Global Investment Research 2
Profit model (HK$ mn) 12/10 12/11E 12/12E 12/13E Balance sheet (HK$ mn) 12/10 12/11E 12/12E 12/13E
Total revenue 8,700.7 11,992.7 13,572.0 13,808.2 Cash & equivalents 7,546.3 7,643.4 8,414.7 9,309.2
Cost of goods sold (6,752.3) (9,339.0) (10,680.8) (10,956.7) Accounts receivable 2,573.7 3,488.9 3,840.5 3,863.2
SG&A (1,055.9) (1,376.3) (1,525.7) (1,547.1) Inventory 779.8 1,106.8 1,164.7 1,183.8
R&D (357.2) (438.5) (494.5) (503.2) Other current assets 719.3 798.7 789.5 790.4
Other operating profit/(expense) 0.0 0.0 0.0 0.0 Total current assets 11,619.1 13,037.8 14,209.3 15,146.6
ESO expense -- -- -- -- Net PP&E 309.1 480.5 597.1 679.6
EBITDA 705.7 1,050.2 1,123.9 1,082.2 Net intangibles 106.1 147.6 147.6 147.6
Depreciation & amortization (170.5) (211.3) (252.9) (281.0) Total investments 27.6 33.1 33.1 33.1
EBIT 535.2 838.9 871.0 801.2 Other long-term assets 191.8 210.3 240.0 280.8
Interest income 82.7 179.0 206.4 251.7 Total assets 12,253.6 13,909.3 15,227.1 16,287.7
Interest expense (63.0) (125.3) (135.8) (147.0)
Income/(loss) from uncons. subs. (0.3) (0.5) 0.0 0.0 Accounts payable 1,874.7 2,654.7 3,035.4 3,185.2
Others 190.2 120.3 72.2 61.3 Short-term debt 6,487.9 6,527.1 6,527.1 6,527.1
Pretax profits 744.9 1,012.4 1,013.8 967.2 Other current liabilities 1,651.3 1,712.4 1,894.5 2,089.9
Income tax (43.1) (61.5) (71.7) (75.5) Total current liabilities 10,014.0 10,894.3 11,457.0 11,802.3
Minorities 0.1 (0.1) 0.0 0.0 Long-term debt 0.0 0.0 0.0 0.0
Net income pre-preferred dividends 701.9 950.8 942.1 891.7 Other long-term liabilities 17.5 16.7 18.0 20.0
Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 17.5 16.7 18.0 20.0
Net income (pre-exceptionals) 701.9 950.8 942.1 891.7 Total liabilities 10,031.5 10,911.0 11,475.1 11,822.3
Post-tax exceptionals 0.0 0.0 0.0 0.0
Net income 701.9 950.8 942.1 891.7 Preferred shares 0.0 0.0 0.0 0.0
Total common equity 2,218.4 2,994.5 3,748.2 4,461.6
EPS (basic, pre-except) (HK$) 0.65 0.86 0.85 0.80 Minority interest 3.7 3.8 3.8 3.8
EPS (basic, post-except) (HK$) 0.65 0.86 0.85 0.80
EPS (diluted, post-except) (HK$) 0.65 0.86 0.85 0.80 Total liabilities & equity 12,253.6 13,909.3 15,227.1 16,287.7
EPS excl. ESO expense (basic) (HK$) -- -- -- --
EPS excl. ESO expense (dil.) (HK$) -- -- -- -- BVPS (HK$) 2.04 2.70 3.38 4.02
DPS (HK$) 0.12 0.17 0.17 0.16
Dividend payout ratio (%) 17.8 20.0 20.0 20.0
Free cash flow yield (%) 12.2 4.7 14.0 15.6
Ratios 12/10 12/11E 12/12E 12/13E
Growth & margins (%) 12/10 12/11E 12/12E 12/13E CROCI (%) 101.1 47.0 45.7 42.0
Sales growth 99.5 37.8 13.2 1.7 ROE (%) 42.4 36.5 27.9 21.7
EBITDA growth 435.2 48.8 7.0 (3.7) ROA (%) 7.4 7.3 6.5 5.7
EBIT growth NM 56.7 3.8 (8.0) ROACE (%) 100.2 59.1 46.8 44.8
Net income growth NM 35.5 (0.9) (5.3) Inventory days 33.2 36.9 38.8 39.1
EPS growth 2,476.5 32.5 (0.9) (5.3) Receivables days 86.1 92.3 98.6 101.8
Gross margin 22.4 22.1 21.3 20.7 Payable days 85.8 88.5 97.2 103.6
EBITDA margin 8.1 8.8 8.3 7.8 Net debt/equity (%) (47.6) (37.2) (50.3) (62.3)
EBIT margin 6.2 7.0 6.4 5.8 Interest cover - EBIT (X) NM NM NM NM
Cash flow statement (HK$ mn) 12/10 12/11E 12/12E 12/13E Valuation 12/10 12/11E 12/12E 12/13E
Net income pre-preferred dividends 701.9 950.8 942.1 891.7
D&A add-back 170.5 211.3 252.9 281.0 P/E (analyst) (X) 11.1 8.4 8.5 8.9
Minorities interests add-back 0.0 0.0 0.0 0.0 P/B (X) 3.5 2.7 2.1 1.8
Net (inc)/dec working capital (796.2) (462.2) (28.7) 108.0 EV/EBITDA (X) 5.2 6.5 5.4 4.8
Other operating cash flow 666.0 (17.7) 191.3 194.5 EV/GCI (X) 2.0 2.5 2.0 1.7
Cash flow from operations 742.2 682.2 1,357.6 1,475.3 Dividend yield (%) 1.6 2.4 2.4 2.2
Capital expenditures (164.8) (304.8) (243.9) (231.7)
Acquisitions (171.8) (223.4) (155.3) (172.7)
Divestitures 0.0 37.8 0.0 0.0
Others 4,994.2 41.7 0.0 0.0
Cash flow from investments 4,657.7 (448.7) (399.2) (404.3)
Dividends paid (common & pref) (125.0) (190.2) (188.4) (178.3)
Inc/(dec) in debt 5,026.3 39.2 0.0 0.0
Common stock issuance (repurchase) 550.7 15.4 0.0 0.0
Other financing cash flows (5,662.7) (0.8) 1.3 2.0
Cash flow from financing (210.7) (136.4) (187.1) (176.4) Note: Last actual year may include reported and estimated data.
Total cash flow 5,189.2 97.1 771.3 894.5 Source: Company data, Goldman Sachs Research estimates.
July 18, 2011 TCL Communication (2618.HK)
Goldman Sachs Global Investment Research 3
Table of contents
Lacking the next leg of a significant growth driver; initiate with a Neutral rating 3
TCL/Alcatel: A success story so far; what’s the next step? 10
Valuation: Decelerating growth momentum in 2012 is priced in 11
Key risks: Market share, 3G Android smartphone, macro outlook, Android patent vulnerability 14
Financials: An improving balance sheet 15
Company profile 17
Prices in this report are based on the market close of July 13, 2011, unless otherwise stated.
Lacking the next leg of a significant growth driver; initiate with a
Neutral rating
We initiate coverage on TCL Comm with a Neutral rating. TCL Comm is a handset
OEM headquartered in China; it has a dual-brand (Alcatel and TCL) OEM business,
and an ODM service.
The company's handsets are sold to China and overseas emerging markets, with
2G feature phones accounting for the majority of its shipments. In 2010, TCL
Comm shipped 36m handsets (+125% yoy), 6% of which was to China. We expect
the company to ship 48m/58m units in 2011/2012 (+32% yoy/+21% yoy).
We attribute TCL Comm’s robust growth in 2010 to its strategy of offering
competitive cost/performance feature phones with MediaTek’s turnkey solutions
to improve time-to-market and Alcatel’s legacy brand preference in emerging
markets, where its major competitors Nokia/LGE/Motorola have been losing
market share.
However we expect TCL Comm to see only 21% shipment growth with earnings
down slightly in 2012E (GSe: -1% yoy) as we expect the growth rate of its major
feature phone business to decelerate while smartphone volumes are too small to
compensate.
We believe the current share price reflects TCL Comm’s decelerating growth. Our
2012E/2013E EPS is 20%-40% below Reuters consensus.
Our views on TCL Comm’s own brand feature phone (around 72% of sales in
2011E):
Feature phone volume expansion in emerging markets is slowing down,
suggesting limited upside for TCL Comm’s total addressable market.
Even though the Chinese and Indian markets could potentially represent
meaningful upside for TCL Comm’s feature phone shipments as its market
share in these two regions is currently low, we believe the competitive
dynamics in China/India are not in TCL Comm’s favor.
We believe any further significant market share expansion for TCL Comm in
non-Asia emerging markets could be difficult as other Chinese handset
vendors (many of whom also use MediaTek’s solution and have a decent
relationship with operators, as TCL Comm does) have been gradually
extending their footprints into these regions.
July 18, 2011 TCL Communication (2618.HK)
Goldman Sachs Global Investment Research 4
Our views on TCL Comm’s own brand smartphone (around 16% of sales in
2011E):
3G smartphone’s higher design complexity and longer lead time for operator
qualification or validation are unfavorable factors for TCL Comm, which is a
relatively new entrant in the smartphone industry.
Despite higher ASP vs. the feature phone, the smartphone’s higher cost
structure and smaller shipment scale could be margin dilutive for TCL Comm.
We believe major global vendors are likely to launch mid-to-low-end models
(Nokia’s WP7 and Apple’s potential launch of a low-cost iPhone) in emerging
markets, which suggests a potentially competitive environment for TCL
Comm in 2012 and onwards.
Continuing growth of feature phones but at a decelerating pace
We expect the feature phone demand growth in emerging markets to peak this
year. Currently the majority of TCL Comm’s handset shipments are sold under
the Alcatel brand, and these products have seen decent sell-through in non-Asia
markets such as Latin America, Eastern Europe, the Middle East, and Africa.
Exhibit 1: We expect feature phone demand from emerging markets to slow down
starting 2012 Emerging market feature phone market size
Source: Gartner, Global Mobile, World Bank, Goldman Sachs Research estimates.
Even though China and India could represent upside potential for TCL Comm’s
feature phone shipments in the next 1-2 years on currently low market share, the
competitive dynamics in these markets are not in TCL Comm’s favor, in our view.
Thus, we are cautious on TCL’s ability to expand its market share aggressively in
these regions. The Chinese and Indian markets are much more fragmented than
14%14%
-3%
16%
18%
9%
8%
-5%
0%
5%
10%
15%
20%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2007 2008 2009 2010 2011E 2012E 2013E
India
China
Emerging markets (excluding China & India)
Emerging markets (excluding China & India) - yoy
Feature phone (mn units)
July 18, 2011 TCL Communication (2618.HK)
Goldman Sachs Global Investment Research 5
other regions, and are occupied by global big players and smaller handset OEMs
(exhibit 2). This leads to a more price-competitive environment, suggesting it
could be difficult for TCL Comm to capture demand without sacrificing ASP or
margins.
Exhibit 2: The Chinese and Indian markets are relatively more fragmented, suggesting more severe price competition Handset OEM unit market share in China, India, Eastern Europe, Latin America, Middle East & Africa
Source: Gartner, Goldman Sachs Research.
As we stated above, we believe TCL Comm’s strategy of taking share from tier-1
vendors by leveraging its well-received Alcatel brand and price difference has
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Top 10 market share: 45%
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India - Handset OEM market share (1Q11)
Top 10 market share: 67%
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Latin America - Handset OEM market share (1Q11)
Top 10 market share: 89%
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Eastern Europe -Handset OEM market share (1Q11)
Top 10 market share: 86%
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Middle East & Africa - Handset OEM market share (1Q11)
Top 10 market share: 89%
Markets that are
more competitive
Markets that are
less competitive
July 18, 2011 TCL Communication (2618.HK)
Goldman Sachs Global Investment Research 6
worked well in markets with less competition/ASP pressure and high OEM
concentration. However, we believe TCL Comm could find it difficult to expand
share meaningfully in these markets, as Chinese/Indian local handset OEMs have
been gradually extending their footprint to regions outside their home markets.
Some of these vendors are leveraging the same cost-competitive MediaTek 2G
feature phone solution and decent relationships with operators, suggesting
increasing competition for TCL Comm, which could cap its potential market share
upside.
Exhibit 3: Chinese and Indian handset OEMs have been expanding to regions outside of Asia, implying increasing
competition for TCL Comm in overseas markets
Source: Goldman Sachs Research.
We therefore project decelerating shipment growth for TCL Comm into 2012/2013
to reflect our view of slowing feature phone demand growth and the more
challenging competitive dynamics TCL Comm is likely to face in the medium to
long term.
China & India
Handset OEMs
July 18, 2011 TCL Communication (2618.HK)
Goldman Sachs Global Investment Research 7
Exhibit 4: While we expect to see continuing shipment and market share growth of TCL
Comm, the pace will be slower, in our view TCL Comm’s own brand feature phone unit market share in emerging markets (China & India
markets excluded)
Source: Gartner, Global Mobile, World Bank, Goldman Sachs Research estimates.
High entry barriers and competitive landscape increase uncertainty
over TCL’s smartphone upside
TCL launched its first Android smartphone in late 2010. However, we believe TCL
Comm is less likely to see a strong product cycle for its smartphones. Ever since
HTC launched the 1st Android smartphone in 2008, many OEMs have entered this
market by leveraging this cost-free open platform. However, the market is still
dominated by less than a handful of companies with the top 5 vendors
accounting for 80%+ market share; we believe this suggests much higher entry
barriers for smartphones vs. feature phones.
11 12 13
25
35
45
53
2.1% 2.1%2.3%
3.9%
4.6%
5.3%
5.8%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
0
10
20
30
40
50
60
2007 2008 2009 2010 2011E 2012E 2013E
TCL Comm's own brand feature phone shipment (mn units; China shipment excluded; L)
TCL Comm's unit market share (emerging markets excluding China & India; R)
July 18, 2011 TCL Communication (2618.HK)
Goldman Sachs Global Investment Research 8
Exhibit 5: The Android smartphone market is dominated by a few vendors, which suggests high entry barriers in
delivering a differentiated, good quality product Android smartphone unit market share by vendor
Source: Gartner, Goldman Sachs Research.
Although we see a business opportunity in the rising smartphone demand in emerging
markets, we think mid-to-low-end smartphones would be the mainstream segment as: (1)
first-time demand accounts for the majority of shipments; and (2) consumers in emerging
markets have higher price elasticity, especially first-time smartphone buyers.
Exhibit 6: We do not expect smartphones to be a volume or profit driver for TCL Comm in the near to medium term TCL Comm’s shipment (LHS) & revenues (RHS) breakdown by product
Source: Company data, Goldman Sachs Research estimates.
TCL Comm uses MediaTek’s chipset solution for its feature phones. The turnkey
solution provided by MediaTek reduces the design complexity for OEMs and
significantly improves the time-to-market capability. The Android smartphone is
TCL Comm’s first attempt to use Qualcomm’s chipset solution, which requires
more design effort, leading to uncertainty around TCL Comm’s product
performance and lead time for new model development.
The higher cost structure for smartphones vs. feature phones and lack of
economic scale in the early stages could weaken TCL Comm’s cost
competitiveness, in our view. Price competition in the mid-to-low-end segment,
especially from Apple and Nokia starting 2012, could make it difficult for TCL to
capture market share.
HTC
Samsung
Motorola
Others
4Q09 Android smartphone unit market share by vendor
HTC
Samsung
Motorola
Sony
Ericsson
LG Electronics
Others
1Q11 Android smartphone unit market share by vendor
14 16
27
38
48
57
2
4
4
1
9
7
6
5
-
10
20
30
40
50
60
70
2008 2009 2010 2011E 2012E 2013E
ODM shipment Smartphone shipment Feature phone shipment
mn units TCL Communication (2618.HK) - Shipment breakdown
4,538 4,234
6,824
8,6809,757
10,332
1,975
2,8642,719
1,876
1,338
951757
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2008 2009 2010 2011E 2012E 2013E
ODM revenues Smartphone revenues Feature phone revenues
HK$mn TCL Communication (2618.HK) - Revenues breakdown
July 18, 2011 TCL Communication (2618.HK)
Goldman Sachs Global Investment Research 9
TCL Comm will also be facing competition from global major smartphone makers,
in our view. As we highlighted in our Compal Comm note “Nokia’s woes, CCI’s
turnaround opportunity; up to Buy, on CL”, dated June 27, 2011, ever since Nokia
announced it was adopting WP7 as its major smartphone platform, it has
continued to emphasize its desire to drive down WP7 pricing points to the mid-
low end, in an effort to revive its sliding smartphone unit market share.
The likely launch of low-cost iPhones could be another threat for all vendors, in
our view. Tier-1 vendors’ intention to launch products with decent specifications
and lower pricing could narrow the opportunities for TCL Comm, which lacks
scale, leading technology expertise, and a smartphone product track record
among both consumers and operators.
We therefore project TCL Comm will ship 2 mn units of smartphones this year
mostly driven by the sell-in demand from telecom operators. Due to high
uncertainty over TCL Comm’s smartphone sell through, we estimate a moderate
ramp-up of the company’s smartphone shipments with 3.6/3.9 mn units in
2012/2013, respectively.
Exhibit 7: We see severe competition in mid-to-low-end smartphones in emerging markets
Source: Goldman Sachs Research.
ODM business, a decreasing contribution
The ODM business was one of the volume drivers for TCL Comm in 2009/2010.
According to our supply chain checks, Motorola Mobility Holdings (MMI) has
been the major ODM customer for TCL Comm, apart from telecom operators.
Based on our MMI analyst Simona Jankowski’s forecast, we expect MMI’s feature
phone shipments to fall, suggesting a shrinking ODM business opportunity for
TCL Comm.
High-end smartphone
Apple, HTC
US$250
Mid-to-low end smartphone
HTC/Samsung/LGE/Huawei
US$100
Mid-to-low end feature phone
Nokia/TCL Communication
US$30
Ultra low-cost feature phone (China/India)
China/India handset OEMs
?
EMERGING MARKETS
High industry entry barrier
Competition
July 18, 2011 TCL Communication (2618.HK)
Goldman Sachs Global Investment Research 10
We have been bearish on the handset EMS/ODM industry on limited outsourcing
orders, and competition from other major EMS/ODM companies such as FIH and
Arima Comma suggests TCL Comm is in an unfavorable position to capture new
business opportunity.
TCL/Alcatel: A success story so far; what’s the next step?
Brand conflict in its home market, China
After it acquired Alcatel’s mobile division, TCL Comm gained the right to use the
“Alcatel” brand and has extended the right to 2024.
The Alcatel brand is known to consumers, especially in markets such as Eastern
Europe and Latin America. In markets outside China, TCL Comm offers Alcatel
branded handsets, which are price competitive.
This strategy works well in regions with higher OEM concentration. TCL Comm’s
impressive performance in 2010 was driven by its strategy of positioning Alcatel
brand handsets in a less crowded market.
The Alcatel brand will continue to be TCL Comm’s key marketing focus,
according to the company, and TCL Comm has been promoting the concept of a
user-friendly, mobile-internet-capable smartphone device under the name
“Alcatel One Touch”.
The Chinese market, where TCL Comm sells handsets under the TCL brand,
seems to represent an opportunity for shipment upside; however we believe TCL
needs to build its TCL brand to establish the brand awareness and preference
within this competitive market.
We are relatively negative on TCL Comm’s dual brand business model in the
current scenario, with TCL Comm promoting its TCL brand products in China
while at the same time some of the Alcatel-branded handsets are also sold to
China market (smuggled handsets or through on-line selling). Hence, we see
risk/reward uncertainty on TCL Comm’s investments in its TCL brand due to such
brand conflicts.
HTC case study – Unified global branding seems a more
sustainable business model
HTC, a smartphone OEM, had adopted a dual-brand business model in China
market for its products before 2010. HTC’s smartphones are sold in China under
the brand name “Dopod”, a China-based company that was responsible for HTC
handsets’ sales and distribution in China market.
This business model came to an end as HTC made several announcements on its
new smartphone models with its “HTC” brand in China in July 2010. We believe
the increasing importance of the China market to HTC’s business could be one of
the reasons for such a change in strategy.
In addition, HTC has witnessed decent improvement of its brand awareness in
American or European markets in 2009/2010; thus HTC could leverage its “HTC”
branding in other markets when pushing its smartphone into China.
We view such strategy works well on HTC’s strong shipment growth for China
market in 2010 and the company’s optimistic outlook of its China business. This
July 18, 2011 TCL Communication (2618.HK)
Goldman Sachs Global Investment Research 11
suggests to us that a unified global branding could be a more sustainable
business model for handset OEMs.
As Alcatel has stronger brand awareness globally – and thus a great brand asset
for TCL Comm to leverage – we believe a unified branding could potentially be a
better strategy for TCL Comm in terms of marketing resource efficiency.
Valuation: Decelerating growth momentum in 2012 is priced in
We rate TCL Communication Neutral with a 12-m TP of HK$6.9. Our target price is
based on 2.0X NTM EV/GCI, implying 8X NTM P/E and 2.2X NTM P/B. We use
historical median EV/GCI vs. CROCI as our valuation methodology due to TCL’s
loss-making record in 2004/2005 and break-even/slim profits in 2006-2009.
Exhibit 8: TCL Comm’s flattish CROCI performance in the
next 12 months suggests lack of share price catalysts
Exhibit 9: We do not use PB-ROE as our valuation
methodology, due to TCL’s historical losses
Source: Datastream, company data, Goldman Sachs Research estimates.
Source: Datastream, company data, Goldman Sachs Research estimates.
We see limited share price potential for TCL Comm currently despite strong
growth in 2010/2011, as we believe the current share price reflects the company’s
2012 growth/earnings profile. We expect the company’s shipment momentum to
slow down, resulting in lack of strong fundamental catalysts for its share price.
-15%
5%
25%
45%
65%
85%
105%
125%
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Jan-06 Oct-06 Jul-07 Apr-08 Jan-09 Oct-09 Jul-10 Apr-11 Jan-12
EV/GCI (L) Median EV/GCI (L) CROCI (R) Median CROCI (R)
TCL Comm (2618.HK) EV/GCI vs. CROCIEV/GCI (X)
Current: 2.2X
Median: 27%
Median: 1.3X
CROCI
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Jan-06 Aug-06 Mar-07 Oct-07 May-08 Dec-08 Jul-09 Feb-10 Sep-10 Apr-11 Nov-11
Fwd P/B (L) Median P/B (L) ROE (R) Median ROE (R)
TCL Comm (2618.HK) P/B vs. ROEP/B (X)
Median: 1.6X
Median: 4%
Current: 2.3X
July 18, 2011 TCL Communication (2618.HK)
Goldman Sachs Global Investment Research 12
Exhibit 10: We expect moderate shipment growth of TCL
Comm and flattish earnings in 2012... TCL Comm’s market cap (LHS) vs. quarterly shipment (RHS)
Exhibit 11: ...suggesting lack of strong fundamental
catalysts for the share price TCL Comm’s market cap (LHS) vs. quarterly earnings (RHS)
Source: Datastream, company data, Goldman Sachs Research estimates.
Source: Datastream, company data, Goldman Sachs Research estimates.
We believe current consensus is overly positive on TCL Comm’s longer term
growth. Compared with consensus, we are more conservative in terms of the
company’s feature phone market share gain potential, resulting in our below
consensus sales and earnings forecasts for 2012/13.
We are also relatively conservative vs. consensus on TCL Comm’s Android
smartphone business, which is reflected in our growth rate assumption in
2012/13. We do not expect smartphones to become a major volume or profit
driver for TCL Comm due to the severe smartphone competition in emerging
markets.
Our concerns over the competitive landscape for TCL Comm’s feature phone and
smartphone businesses in the longer term leads to our lower-than-consensus
ASP (due to our lower mix of higher-ASP smartphones) and margins.
-
2
4
6
8
10
12
14
16
18
20
0
200
400
600
800
1,000
1,200
1,400
Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12
TCL shipments (mn units, R)
TCL market cap (US$mn; L)
(150)
(100)
(50)
-
50
100
150
200
250
300
350
400
0
200
400
600
800
1,000
1,200
1,400
Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12
TCL earnings (HK$mn, R)
TCL market cap (US$mn; L)
July 18, 2011 TCL Communication (2618.HK)
Goldman Sachs Global Investment Research 13
Exhibit 12: Summary of Street view vs. GS view on TCL Comm
Source: Bloomberg, Goldman Sachs Research.
Exhibit 13: Valuation comparison
* Conviction List; for important disclosures, please go to http://www.gs.com/research/hedge.html.
Source: Datastream, company data, Goldman Sachs Research estimates.
Market view GS viewShipment
Smartphone
China
Feature phone
ASP
Blended ASP
Margins
GM
Expect ASP to be sustainable driven by the improving
product mix
Sustainable ASP in 2011 driven by smartphone sell-in
demand. Higher ASP pressure into 2012 due to the
competition of both mid-end smartphone and feature
phone in emerging markets
Relatively stable GM due to product mix and stable
ASP
GM is likely to trend down gradually on ASP pressure
and higher cost structure of smartphone
Expect to see a meaningful shipment ramp up of
smartphone
Smartphone competition in emerging markets could
be severe. TCL might see some sell-in demand in 2011
while growth momentum into 2012/2013 could be
very limited
Expect TCL to see a meaningful improvement of its
China business
China handset market dynamic is not in TCL's favor,
upside potential from China business could be limited
Continuing market share gain Continuing market share gain while the magnitude
could be much more moderate vs. 2010
Current Mkt capTicker Company Rating Ccy price USD mn CY11E CY12E CY11E CY12E CY11E CY12E CY11E CY12E CY10 CY11E CY12E
China handset/Consumer electronics companies2369.HK China Wireless Technologies Neutral HKD 1.8 501 0.15 0.18 -34% 22% 11.8x 9.6x 1.7x 1.5x 42% 18% 16%
0992.HK Lenovo Group Buy HKD 4.8 6,277 0.29 0.36 51% 22% 16.3x 13.3x 3.0x 2.6x 14% 19% 20%
0763.HK ZTE Corporation (H) Neutral HKD 27.0 2,182 1.41 1.67 20% 19% 19.1x 16.1x 2.9x 2.6x 16% 16% 17%
1169.HK Haier Electronics Group Neutral HKD 9.5 2,853 0.65 0.85 16% 31% 14.6x 11.2x 4.7x 3.3x 48% 39% 35%
2618.HK TCL Communication Neutral HKD 7.2 1,025 0.86 0.85 33% -1% 8.4x 8.5x 2.7x 2.1x 42% 36% 28%
Median 18% 22% 15.5x 12.3x 3.0x 2.6x 29% 18% 18%
Global branded handset makers2498.TW HTC Corp. Buy* NTD 929.0 26,304 89.98 118.50 84% 32% 10.3x 7.8x 5.8x 3.7x 56% 71% 57%
AAPL Apple Inc. Buy* USD 358.0 331,080 26.69 31.35 51% 17% 13.4x 11.4x 4.1x 3.0x 37% 37% 31%
RIMM Research In Motion Ltd. Sell USD 28.2 14,754 5.46 5.42 -9% -1% 5.2x 5.2x 1.3x 1.0x 41% 29% 22%
NOK1V.HE Nokia Neutral EUR 4.1 21,458 0.12 -0.01 -80% NM 33.3x NM 1.2x 1.3x 13% -7% -5%
MMI Motorola Mobility Holdings Inc. Buy USD 21.5 6,327 0.01 1.45 NM 12071% 1,799.1x 14.8x 1.2x 1.1x -5% 0% 8%
005930.KS Samsung Electronics Buy* KRW 843,000 117,084 87,806 112,713 -5% 28% 9.6x 7.5x 1.5x 1.2x 21% 16% 18%
066570.KS LG Electronics Neutral KRW 81,000 11,048 5,809 9,945 -26% 71% 13.9x 8.1x 1.0x 0.9x 3% 7% 11%
Median -7% 30% 13.4x 7.8x 1.3x 1.2x 21% 16% 18%
Global handset ODM/EMS companies2038.HK Foxconn International Holdings Sell HKD 3.5 3,235 -0.20 -0.16 NM NM NM NM 0.9x 1.0x -6% -5% -4%
0285.HK BYD Electronic Neutral HKD 3.1 882 0.37 0.34 -29% -9% 8.3x 9.1x 0.8x 0.7x 15% 9% 8%
8078.TW Compal Communications Buy* NTD 34.6 728 -0.65 1.86 NM NM NM 18.6x 2.2x 1.9x -3% -4% 11%
FLEX Flextronics International LTD. Sell USD 6.4 4,736 0.87 1.00 21% 15% 7.3x 6.4x 1.8x 1.4x 28% 27% 25%
JBL Jabil Circuit, Inc. Buy USD 20.2 4,418 2.13 2.57 50% 20% 9.5x 7.9x 2.1x 1.7x 19% 24% 24%
Median 21% 15% 8.3x 8.5x 1.8x 1.4x 15% 9% 11%
EPS (GAAP) EPS growth P/E P/B ROE (GAAP)
July 18, 2011 TCL Communication (2618.HK)
Goldman Sachs Global Investment Research 14
Key risks: Market share, 3G Android smartphone, macro outlook,
Android patent vulnerability
MediaTek’s 3G Android chipset: We believe MediaTek’s 2G chipset solution,
which is cost competitive with decent performance, is the major reason for
Chinese and Indian handset OEMs’ strong performance in emerging markets. In
the 3G smartphone era, Qualcomm has dominated the main chipset market while
MediaTek hasn't officially launched its product for 3G smartphone.
If MediaTek’s 3G smartphone chipset solution launches successfully in terms of
performance and cost competitiveness, Chinese and Indian handset OEMs could
leverage MediaTek’s efforts to drive down cost and potentially even repeat the
product cycle of their 2G feature phones.
However, we believe such a scenario is less likely to materialize in the near term
due to the higher design complexity of 3G smartphones and the requirement of
qualification/validation or product customization by operators, suggesting a
longer lead time for product launches.
Feature phone market share in emerging markets: Our current 2012 estimate
for TCL Comm’s own-brand feature phone shipments implies 3.2% volume share
in emerging markets (China and India included) vs. 2.9% in 2011. Our sensitivity
analysis suggests every 1% market share gain/loss implies 22% upside/downside
to our current 2012E EPS, with other assumptions remaining unchanged.
Exhibit 14: Our sensitivity test suggests potential 22% EPS upside or downside for every 1ppt feature phone market
share gain or loss of TCL Comm in emerging markets Sensitivity test on TCL Comm’s market share gain/loss in emerging markets
Source: Goldman Sachs Research estimates.
Smartphone business: Higher-than-expected shipment of smartphones by TCL
Comm could boost its revenues as smartphones have much higher ASP (around
US$100) than feature phones (around US$25-30). Our sensitivity analysis
suggests that every 1m unit increase/decrease of smartphone shipments implies
6% upside/ downside to our 2012E EPS, other assumptions remaining unchanged.
However, we see higher potential variability in TCL Comm’s smartphone margins
vs. feature phones due to smartphones’ higher cost structure; thus the shipment
upside is likely to be offset by lower margins/ASPs.
2012E Base TCL Comm's 2012E EPS (HK$)Emerging market feature phone shipment (m units) 1489 TCL's feature phone market share TCL Comm unit market share 3.2% 1.04 1% 2% 3% 4% 5%TCL Comm shipment (own brand feature phone) 48 5% 0.34 0.47 0.60 0.74 0.87
6% 0.40 0.57 0.73 0.89 1.05
Key assumptions Bull case 7% 0.47 0.66 0.85 1.04 1.23
TCL Comm unit market share 4.2% 8% 0.54 0.76 0.97 1.19 1.40
TCL Comm shipment (own brand feature phone; m units ) 63 9% 0.61 0.85 1.09 1.34 1.58
ASP (US$) 26
Difference to GSe 2012E EPS (HK$ m) TCL's feature phone market share
Revenues from own brand feature phone 12,769 0.00 1% 2% 3% 4% 5%Others revenues 3,815 5% -60% -45% -29% -13% 3%
Total revenues 16,584 6% -52% -33% -14% 5% 24%
NPM 6.9% 7% -44% -22% 0% 22% 44%
EPS (HK$) 1.04 8% -36% -11% 14% 40% 65%
Difference vs. GSE 22% 9% -28% 0% 29% 57% 86%
NP
M
NP
M
July 18, 2011 TCL Communication (2618.HK)
Goldman Sachs Global Investment Research 15
Exhibit 15: Our sensitivity test suggests 6% upside/downside to 2012E EPS if TCL Comm sees 1m increase/decrease in
smartphone shipments in 2012 Sensitivity test on TCL Comm’s smartphone shipments
Source: Goldman Sachs Research estimates.
Competition and macro-economic outlook: The competitive dynamics of the
handset market could lead to upside or downside risks to our margin projections
for TCL Comm. On the other hand, the macro-economic outlook for 2H or 2012 is
also a critical factor in the overall handset/smartphone end demand.
Android patent vulnerability: We believe the Android OS could potentially
become no longer free of charge from the handset OEMs’ standpoint, due to
likely licensing payments to non-Google companies. Microsoft has filed a patent
infringement lawsuit against Motorola and its Android line-up; HTC has obtained
a licensing agreement by paying royalty fees to Microsoft; and according to Maeil
Business Newspaper, Samsung has reached an agreement to pay Microsoft $15
per smartphone (around 4% of ASP).
Financials: An improving balance sheet
TCL Comm has seen meaningful improvement of its balance sheet on its strong
financial performance in 2010. As of 1Q11, TCL Comm has net cash of HK$1 bn or
42% of its total equity.
In terms of capex and capacity plan, TCL has targeted 65m units of capacity by
end-2011 from its current monthly run rate of 5m units. For its future capacity
expansion, TCL plans to build a new factory next to its existing fab in Huizhou.
The total capex budget for this year would be around HK$350 mn, of which
HK$200m will be for the new factory.
Considering TCL’s current cash on hand, we view its cash position as sufficient
for the company’s further expansion without additional funding.
2012E Base TCL Comm's 2012E EPS (HK$)TCL Comm smartphone shipment (mn units) 3.6 TCL Comm smartphone shipment (mn units)TCL Comm smartphone ASP (US$) 101.5 0.90 1.6 2.6 3.6 4.6 5.6
5% 0.53 0.57 0.60 0.64 0.68
TCL Comm total shipment (mn units) 57.7 6% 0.64 0.68 0.73 0.77 0.81
TCL Comm belended ASP (US$) 30.2 7% 0.75 0.80 0.85 0.90 0.95
8% 0.86 0.92 0.97 1.03 1.08
NPM 6.9% 9% 0.97 1.03 1.09 1.16 1.22
Key assumptions Bull case Difference to GSe 2012E EPS TCL Comm smartphone shipment (mn units) 4.6 TCL Comm smartphone shipment (mn units)TCL Comm feature phone shipment (mn units) 48 0.00 1.6 2.6 3.6 4.6 5.6TCL Comm ODM shipment (mn units) 5.8 5% -37% -33% -29% -25% -21%
TCL Comm total shipment (mn units) 58.7 6% -24% -19% -14% -9% -4%
TCL Comm belended ASP (US$) 31.5 7% -12% -6% 0% 6% 12%
Diff vs. Gse 4% 8% 1% 8% 14% 21% 28%
9% 14% 21% 29% 36% 44%
(HK$ m)
Revenues from feature phone 9,757
Revenues from smartphone 3,654
Other revenues 951
Total revenues 14,362
NPM 6.9%
EPS (HK$) 0.90Difference vs. GSE 6%
NP
M
NP
M
July 18, 2011 TCL Communication (2618.HK)
Goldman Sachs Global Investment Research 16
Exhibit 16: TCL Communication quarterly profit model (HK$mn)
Source: Company data, Goldman Sachs Research estimates.
Summary Income Statement 1Q2011 2Q2011E 3Q2011E 4Q2011E 1Q2012E 2Q2012E 3Q2012E 4Q2012E 2010 2011E 2012E 2013E
Net sales 2,124 2,532 3,219 4,118 2,897 3,145 3,470 4,060 8,701 11,993 13,572 13,808 Cost of good sold (COGS) (1,651) (1,957) (2,505) (3,225) (2,288) (2,481) (2,721) (3,190) (6,752) (9,339) (10,681) (10,957)
Gross profits 473 575 713 892 609 664 748 870 1,948 2,654 2,891 2,852 Operating expenses (369) (404) (476) (565) (457) (484) (513) (566) (1,413) (1,815) (2,020) (2,050) SG&A (280) (307) (363) (427) (345) (368) (389) (424) (1,056) (1,376) (1,526) (1,547) R&D (90) (97) (114) (138) (112) (116) (123) (143) (357) (439) (494) (503)
Operating profits 104 171 237 327 152 180 236 303 535 839 871 801 Non-operating income/(loss) 79 28 31 35 32 35 37 40 210 174 143 166
Earnings before tax (EBT) 183 199 268 362 184 215 272 343 745 1,012 1,014 967 Income tax credit/(expense) (3) (15) (21) (24) (4) (18) (24) (26) (43) (62) (72) (75) Extraordinary gain/(loss) - - - - - - - - - - - - Minority Interests (0) - - - - - - - 0 (0) - -
Earnings after tax (EAT) 180 184 248 339 180 197 248 317 702 951 942 892
EPS (HK$) 0.16 0.17 0.22 0.31 0.16 0.18 0.22 0.29 0.65 0.86 0.85 0.80 EPS (fully diluted, HK$) 0.16 0.17 0.22 0.31 0.16 0.18 0.22 0.29 0.65 0.86 0.85 0.80
Ratio analysis and assumptions
As % of salesGross margin 22.3% 22.7% 22.2% 21.7% 21.0% 21.1% 21.6% 21.4% 22.4% 22.1% 21.3% 20.7%Operating expense ratio -17.4% -16.0% -14.8% -13.7% -15.8% -15.4% -14.8% -14.0% -16.2% -15.1% -14.9% -14.8%Operating margin 4.9% 6.8% 7.4% 7.9% 5.2% 5.7% 6.8% 7.5% 6.2% 7.0% 6.4% 5.8%Pre-tax margin 8.6% 7.9% 8.3% 8.8% 6.3% 6.8% 7.9% 8.4% 8.6% 8.4% 7.5% 7.0%Tax rate (as % of EBT) 1.5% 7.3% 7.7% 6.5% 2.1% 8.4% 8.8% 7.5% 5.8% 6.1% 7.1% 7.8%Net margin 8.5% 7.3% 7.7% 8.2% 6.2% 6.2% 7.2% 7.8% 8.1% 7.9% 6.9% 6.5%
QoQ growth (%)Sales -31.3% 19.2% 27.1% 27.9% -29.6% 8.6% 10.3% 17.0%Gross profits -32.6% 21.6% 24.1% 25.1% -31.7% 9.0% 12.7% 16.2%Operating profits -37.8% 65.0% 38.7% 38.0% -53.6% 18.6% 31.0% 28.5%Non-operating profits -4.3% -64.9% 12.4% 11.5% -9.0% 8.7% 5.8% 9.1%Pre-tax profits -26.6% 8.7% 35.0% 34.9% -49.3% 16.9% 26.9% 25.9%Net profits -28.0% 2.3% 34.5% 36.6% -46.9% 9.3% 26.4% 27.8%EPS (weighted averaged) -29.6% 2.3% 34.5% 36.6% -46.9% 9.3% 26.4% 27.8%
Yoy growth (%)Sales 44.1% 28.1% 49.3% 33.1% 36.4% 24.2% 7.8% -1.4% 99.5% 37.8% 13.2% 1.7%Gross profits 61.8% 33.1% 36.6% 27.2% 28.8% 15.5% 4.9% -2.5% 105.4% 36.2% 8.9% -1.4%Operating profits 117.3% 51.3% 13.9% 96.5% 46.6% 5.3% -0.5% -7.4% NM 56.7% 3.8% -8.0%Non-operating profits 213.2% -70.0% 266.8% -57.8% -59.9% 24.0% 16.7% 14.2% 438.2% -17.2% -17.7% 16.3%Pre-tax profits 150.6% -3.4% 23.9% 45.2% 0.4% 7.9% 1.5% -5.3% 2085.7% 35.9% 0.1% -4.6%Net profits 159.0% 2.0% 22.9% 35.4% -0.2% 6.7% 0.2% -6.3% 2951.0% 35.5% -0.9% -5.3%EPS 148.2% -1.3% 19.5% 32.4% -0.2% 6.7% 0.2% -6.3% 2476.5% 32.5% -0.9% -5.3%
Dividend policiesCash dividends (HK$ per share) 0.12 0.17 0.17 0.16 Payout ratio (%) 17.8% 20.0% 20.0% 20.0%
July 18, 2011 TCL Communication (2618.HK)
Goldman Sachs Global Investment Research 17
Company profile
Exhibit 17: TCL Comm’s key business structure
Source: Company data.
TCL Communication Technology Holdings Limited (TCL Communication) is a
subsidiary of TCL Corporation (47% of holdings). TCL Comm’s shares listed on
the Hong Kong Stock Exchange in 2004.
Headquartered in China, TCL Comm is a handset OEM company with dual brand
names (TCL and Alcatel). The company also provides ODM services for OEM
companies or telecom operators.
In 2004, TCL Comm set up a joint venture “TCL & Alcatel Mobile Phones Limited
(T&A)” with Alcatel. In 2005, T&A became a wholly owned subsidiary of TCL
Comm.
In 2008, TCL Comm announced its business restructuring plan and indicated that
its businesses will operate under two brands: Alcatel and TCL.
TCL Comm’s largest selling product is its 2G feature phone. The company started
its smartphone business in late 2010. In 2010, TCL Comm shipped 36mn handset
units (own brand & ODM), accounting for 2.5% of the global handset market. For
2011, currently the company’s official shipment target is 50mn units.
TCL Communication (2618.HK)
ODM
The Board of Directors TCL Group General Shareholders
47% of holdings3 % 50%
July 18, 2011 TCL Communication (2618.HK)
Goldman Sachs Global Investment Research 18
Reg AC
I, Robert Yen, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or
companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific
recommendations or views expressed in this report.
Investment Profile
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market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites
of several methodologies to determine the stocks percentile ranking within the region's coverage universe.
The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:
Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate
of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend
yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends.
Quantum
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in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets.
GS SUSTAIN
GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list
includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and
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environmental, social and governance issues facing their industry).
Disclosure Appendix
Coverage group(s) of stocks by primary analyst(s)
Robert Yen: Asia Pacific Technology.
Asia Pacific Technology: AAC Acoustic, Acer, Advanced Semiconductor, Advanced Semiconductor (ADR), ASUSTeK Computer, AU Optronics, BYD
Electronic, Catcher Technology, Cheng Uei Precision (Foxlink), Chimei Innolux, China Wireless Technologies, Chipbond Technology Corp., Compal
Communications, Compal Electronics, Coretronic, Delta Electronics, E Ink Holdings Inc, Epistar, Everlight Electronics, Foxconn Int'l Holdings,
Foxconn Technology, Hon Hai Precision, HTC Corp., Largan Precision, Lenovo Group, Lite-On Technology, Nan Ya PCB, Novatek Microelectronics,
Pegatron, Powertech Technology, Quanta Computer, Radiant Opto-Electronics, Siliconware Precision, Siliconware Precision (ADR), Silitech
Technology, SK C&C, TCL Communication, TPK Holding, TPV Technology, Tripod Technology, Unimicron, Wintek, Wistron, Young Fast
Optoelectronics.
Company-specific regulatory disclosures
The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies
covered by the Global Investment Research Division of Goldman Sachs and referred to in this research.
Goldman Sachs has received compensation for non-investment banking services during the past 12 months: TCL Communication (HK$7.18)
Goldman Sachs had a non-securities services client relationship during the past 12 months with: TCL Communication (HK$7.18)
Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
Rating Distribution Investment Banking Relationships
Buy Hold Sell Buy Hold Sell
Global 32% 54% 14% 52% 41% 37%
July 18, 2011 TCL Communication (2618.HK)
Goldman Sachs Global Investment Research 19
As of July 1, 2011, Goldman Sachs Global Investment Research had investment ratings on 3,167 equity securities. Goldman Sachs assigns stocks as
Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for
the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.
Regulatory disclosures
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Ratings, coverage groups and views and related definitions
Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy
or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned
as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment
Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular
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Return potential represents the price differential between the current share price and the price target expected during the time horizon associated
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Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at
http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst's investment
outlook on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the
following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook
over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment
outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation.
Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in
an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis
July 18, 2011 TCL Communication (2618.HK)
Goldman Sachs Global Investment Research 20
for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment
rating and price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has
suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.
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